The risks when day trading for a living
Like any other investment, trading has its risks.
The biggest risk is losing your capital. Before you take on day trading for a living you need to have a strong understanding of a trading strategy. This strategy should not only allow you to find good trades, it should help you manage risk. A trading strategy and risk management system in trading are what give a trader the “trader’s edge”.
Think of day trading for a living being a little like running a casino. Of course, gambling is very risky, and the gambler loses more often than not. Obviously, you don’t want to be the gambler in this situation.
Those that are unsuccessful at trading conduct themselves as the gambler. Those that find success trade as though, they are the “house” that is, they’re running the casino. While the house runs the risk of losing, they have the odds stacked in their favour. If probability falls in your favour, you usually win more often than not. This is what it is like to have the trader’s edge.
The correct strategy and risk management, provides the potential for a profitable day trading business.
The tools needed to trade for a living
There are several tools needed to trade, certainly if you want to trade well. The tools required differ in some cases depending on what you are trading. Below are some examples of the tools that you will need.
Of course, a scanner is only needed if you are trading stocks or options. A stock scanner is an excellent tool used to find trading opportunities. You can input criteria that match your trading strategy. You can look for things like, volume, momentum, you can also find scanners that look for patterns. If you want to trade stocks of options for a living, this is an invaluable tool.
Example of stock scanner, image from Finviz.com
If news can influence the product or market you trade, it’s useful to be aware of news when preparing to trade. This context can help you with your decision making.
Broker / Trading Account
For almost all types of day trading already discussed you will need a broker. A broker sets price, and sends your orders to the market. The broker will also hold your funds in a trading account.
For Futures traders this isn’t necessary.
You can connect your trading platform to an exchange (market) directly. This means that a broker doesn’t set price, you get the true price from the market. If your platform doesn’t provide the ability to hold funds you will also need to have a clearing house. A clearing house holds your funds and releases them when needed.
Most brokerage firms offer a free trading platform if you use their services. They do this because they will be able to make money off of commissions and other fees. There are also paid platforms either as a one off or subscription. In most cases these platforms aren’t responsible for brokerage services. These platforms will only perform charting and trade execution.
As mentioned earlier in this article, it is important to have a trading journal. You can trade without a journal, and maybe even be successful at it. But a trading journal is a must if you want to day trade for a living. A trading journal lets you refine your trading and become a better trader.
How much does it cost to day trade for a living?
This depends on many factors. The market and product you trade is a big factor. Here are some other related costs with learning to day trade and also day trading for a living.
Day Trading Education
This is not what you want to skimp on. The reason being is that if you have a poor education when it comes to trading, you’re likely to lose money.
Consider this; you can pay an educator to learn, or you can learn your own very expensive lesson from the market.
The benefit of in-depth learning is that you have a skill moving forward that has the potential to make you money. If you give your money to the market, you will have nothing to show for it.
Many people try to skip the learning phase and they fail miserably.
Funds To Trade
This again depends on what you’re trading. If you want to be able to day trade products like stocks, or options you will need an account of $25,000.
The Pattern Day Trader (PDT) rule states you can’t day trade with an account under $25,000.
If you trade Forex, CFDs, or Futures you can trade with a much smaller account as the PDT rule doesn’t apply.
Here are the minimums you can need to day trade for a living
- Stocks: $25,000
- Options: $25,000
- CFDs: $2,000
- Forex: $500
- Futures: $500
If you do choose to trade a small account you increase your risk per trade, so starting at $500 can be difficult. Some traders choose to start with around $2,000 to $3,000 in a trading account.
Trading Platform (if applicable)
If you’re trading with a broker they may provide you with a free platform, others may need to pay. You need to weigh up the pros and cons of each option. Keep in mind that although a broker may provide a free platform, they will make money from you in other ways.
We use NinjaTrader as they are one of the most awarded platforms for Futures trading. NinjaTrader is a paid platform, we feel being able to connect directly to a market outweighs the cost.
NinjaTrader platform connects directly to the exchange (CME Group)
Can you make a living day trading?
Can you make a living day trading is a very common question that we get. The short answer is yes, but you need to be realistic. The reality is that the vast majority of day traders fail. Those that fail often have the wrong expectations for day trading as a living.
The most important place to start is to consider your goals. When do you expect to be trading a live account? You’ll need to learn a strategy and practice it on a simulated account.
If your goal is to day trade for a living you must treat your trading as a business rather than a hobby.
Those who are in a rush tend to fail.
Remember that when you ask yourself “can i make a living day trading?” If you can’t be patient and don’t take things seriously, the answer will be ‘no’.
How much money can I make day trading?
If you’re day trading for a living the amount you can make depends on a few things. Of course, it will depend on your profit loss percentage. It will also depend on whether you are able to make your winning trades larger than your losing trades.
The larger the account the more room for profit without over risking your account. This means that the dollar amount of your return would be larger than if you had a smaller account.
The answer the question ‘how much money can I make day trading?’ question is that there isn’t a limit to the earning potential. BUT you need to limit your risk and seek a reasonable return. There is also a real risk of losing money. It all comes down to how well you follow your plan and manage your risk.
Image source: news.com.au
Tips for beginner traders
Learn a trading strategy that you believe works and learn it inside out. You can do this by practicing the strategy after completing your theory. You can practice this on a simulated trading or “Paper trading” account. This will let you practice your trading without risking any real money.
Don’t start trading with a huge amount of money. Even when you have practiced and you are confident in your trading, start small. Trading a live account is very different to trading a simulation account. Trading live ads all the emotion that you need to control. You might have proved you can trade a strategy but you now need to prove yourself again in a live account.
Risk only a small amount of money until you are happy with your consistency.
Make sure you have a goal for each trading session. This can be a dollar value, or the number of trades you can place, etc.
Don’t keep on trading if you reach your target. If you reach your target and keep trading you risk giving all your profits back.
If you’re having a bad day, or you don’t feel you will be able to concentrate for the session, don’t trade. It’s ok to skip a session and pick things up again in the next session.
Don’t be greedy. Take your time in building your account.
How to make a living day trading – What you need:
If you want to know how to trade for a living, you’re going to need to know what it takes. Below is an outline of what you need so that you actually can day trade for a living.
It’s possible to teach yourself to Day Trade. But self-learning is unstructured, and unsupported. You can also end up with a Frankenstein’s Monster of different techniques and strategy.
When looking at day trading courses, something worth looking for is an educator that have a track record for their strategy. Or you can look for an educator that runs a live trading room. We allow non-members into our trading rooms once per week or on request. This allows us to be transparent in what we do and you can see whether you think the strategy works.
It’s a good idea to learn an existing strategy from a reputable educator.
Pro tip: learn with an educator that has a license with a government body.
In Australia the government body is ASIC
(Australian Securities and Investments Commission). IDTA are a Corporate Authorised Representative (CAR Number 001250922) underneath a financial license holder. What this means is that we must adhere to strict compliance.
A trading support channel
A trading support channel is an important part of your trading education. This is because it allows you to have access to an educator throughout your trading journey.
If you’re considering learning to trade look for an educator that provides support. There are many educators out there providing online content with little support. At IDTA we have built a strong support channel and community.
If you want to day trade for a living, it might be a good idea to find a day trading mentor while you’re starting out.
All IDTA content is available forever and support channels are always open for you to use.
Practice your trading
Even if you’re confident in the theory of your trading strategy, it’s important to practice. It’s like learning to drive, you need to have all the skills before you can drive by yourself.
At IDTA we use trading indicators, simulated accounts, and a Live Trading Room. These 3 things combined allow you to practice your trading with guidance.
With a simulated account you can do this without risking any real money in the market. Those who jump into trading after learning a strategy often fail. Having a means of practicing will greatly improve your trading.
A good trading strategy
A trading strategy is a key part of your success as a trader but that doesn’t mean it’s the only part. It’s all about finding the right strategy for your trading style. With so many strategies available it can be hard to tell what is right for you and your trading style.
Here are a few questions to ask yourself when looking for a strategy:
- Does this strategy match the amount of risk I am willing to take?
- Does this strategy have a proven track record?
- Does this strategy fit my lifestyle
- Does this strategy work on the market I want to trade?
- Can I follow this strategy?
If you want to learn more about the International Day Trading Academy’s own trading strategy you can join us for our next free day trading classes online